Why You Should Know About YY Inc IPO

Nov.21.12 | About: YY Inc. (YY)

Shares of Chinese internet company YY Incorporated (NASDAQ:YY) are expected to price during the shortened Thanksgiving week. The IPO marks the first Chinese technology offering in some time and offers a great opportunity for investors looking to get into the most popular country and take advantage of a growing internet population.

YY will offer 7.8 million American Depository Shares, each representing 20 Class A shares. A total of 156 million shares will be represented. The company plans on pricing between $10.50 and $12.00 per share. After the IPO, 98.3% of the voting power will continue to be held by the company through a series of Class B shares. With voting rights aside, public investors will own 14.7% of the company.

In 2008, YY launched YY Client, which now has over 400.5 million registered users (as of September 30). The company also owns YY.com, YY Music, and Duowan.com. In 2011, the company had a huge 84.2% market share of real-time online group voice communication in China. YY remains one of the leaders in the online games market in China, as Duowan is the number two game media website in the most populous nation.

Strengths listed by YY in its offering summary:

· Large and highly engaged user base

· Powerful network effects

· Superior user experience

· Scalable platform serving a broad range of potential end markets

· Proprietary and scalable technology infrastructure

Key strategies going forward for YY:

· Further expand our user base

· Increase the monetization of our user base

· Further develop and expand the use of Mobile YY

· Continue to invest in our leading technology infrastructure

Here is a look at the company's financials (all figures in RMB):

  2009 2010 2011
Online games 12.98 million 86.32 million 165.93 million
YY Music 0 0 52.85 million
Other 0.85 million 1.28 million 13.59 million
Online Advertising 18.88 million 40.74 million 87.28 million
Net Revenue 32.71 million 128.34 million 319.66 million
Gross profit 3.86 million 18.28 million 136.96 million
Operating income -46.57 million -235.53 million -99.49 million
Earnings per share -0.81 -5.04 -0.63
Click to enlarge

As you can see from the chart, YY has seen explosive growth in revenue areas. Net revenue has increased from $32.71 million RMB to $319.66 million RMB in three years. The company is not profitable at the current time.

Here is a look at the company's growing base of subscribers across different channels:

Average Monthly Users Sep 30 2011 Sep 30 2012
Online games 32.2 million 37.3 million
YY Music 19.7 million 26.6 million
YY Platform 49.3 million 68.9 million
Paying Online games 279 thousand 283 thousand
Paying YY Music 150 thousand 355 thousand
Paying Memberships 0 356 thousand
Click to enlarge

As you can see, YY is growing its subscriber bases. The number of people paying for services offered by the company has also increased, bringing in additional revenue.

The big negatives going forward for an investment in YY are:

· Lack of voting power - as mentioned above, public shareholders will only have 1.7% of total votes

· Not profitable - despite increasing revenue and gross profits, YY has not posted a profit

· Cayman Islands ownership - I always see it as a complicated ownership structure when the Cayman Islands are involved. This complicated taxation and shareholders rights as the company is governed in the territory

YY will use its proceeds to improve the operations of the company.

· $15.0 million invested in voice and video technology

· $15.0 million to expand product development

· $15.0 million to expand sales and marketing

· The rest will be used for general corporate

I am waiting to see what shares price at, but think that at the low to mid range shares look attractive. The company has seen a lot of investor interest, which could see an increase in pricing or an initial rise on the company's open day of trading. I wouldn't go overboard for this Chinese company, but definitely think it has long term growth ahead. Once the company can gets its revenue to turn into a profit, the strong growing subscriber bases will reward shareholders for the long term.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in YY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.